Thank you, and welcome to Pandora's conference call following the release of our Q2 report, distributed through the wires this morning at 8 A.M. The presentation for this call is available on pandora.com/investor. My name is Morten Eismark from Pandora Investor Relations, and with me here today is CEO Bjørn Gulden and CFO Henrik Holmark. In accordance with the agenda on slide two, Bjørn Gulden will go through a few Q2 highlights, including an update on our Stock Balancing Campaign and feedback on our recent collections. And after this update from Bjørn, Henrik will go through the numbers, after which Bjørn will conclude the presentation. We'll be ready to take your questions. Before handing over to Bjørn, I kindly ask you to pay attention to the disclaimer on page 3. Bjørn, please go ahead.
Thank you, Morten. Good morning, everybody. Please turn to slide four, where I will walk you through some of the most important highlights in Q2. I'm pleased to say that our operation and sales developed as planned during second quarter, even with a slightly higher gross margin. We feel we are on track, so our guidance for the full year is confirmed for revenue and EBITDA. The improvement in gross margin has made us update the full year guidance slightly from low 60s% to mid-60s%. As you will know from our previous reports, there are currently two major initiatives in place to turn around our sales-out, a Stock Balancing Campaign and a realignment of a price architecture, and product range.
One, the Stock Balancing Campaign, aimed to improve quality of retailer stock, progresses as planned, with continued high participation rate amongst our retail partners. Equally important, our competitively priced Spring/Summer 2012 Collection, launched in Q1 2012, continues to do very well in terms of sales out. We see that both the product designs and the price points are right. The customers like them and buy them. I'm happy to report that also our Autumn/Winter range, that will be in retail end of Q3, and that is based on the same design and price direction as the Summer Collection, has been very well received by retailers in the market previews around the world. I feel, that with these two Collection, we have taken the right steps, assuring that we again have a competitive and attractive assortment to offer our customers, and that's in the right price points.
I will revert back to these two initiatives shortly. On top of these highlights just mentioned, and as emphasized back in Q1, we continue to work hard to improve our general operation, and that means to align computer systems, standardize processes, consolidate warehouses, and open new markets, and all of this simultaneously. As is evident from the Q2 report, these many projects have hurt our cost ratio this quarter. Cost as a percentage of revenue, even without the negative Stock Balancing Campaign effect this quarter, is not where I want it to be. It has to improve, and it will. However, investing in all of these projects makes sense, and it will create future value, but it carries a lot of cost doing all these activities at the same time.
It is costly to run double systems until the new and better systems are taking over and replacing old systems. No excuses, just facts. It's hard work. Now, I would like you to turn to slide five and take you through the Q2 financial headline figures. These numbers are, as you have been explained before, impacted by the stock balancing program, and it is not possible to properly define how to make adjustments, especially not on quarterly numbers, where the phasing of returns and replacement will vary between the individual quarters. So we had a revenue in Q2 of DKK 1,260 million. We had a gross margin of 67.9%. We have an EBITDA of DKK 220 million. That gives us an EBITDA margin of 17.5%.
We had a cash conversion rate of 144.4%, and we had a net interest-bearing debt of DKK 737 million. Given the importance of the Stock Balancing Campaign, I would now like to spend some time explaining it in detail again. Please turn to slide number six. I assume most of you are familiar with our Stock Balancing Campaign, so I will only briefly run through the mechanics. A number of retailers worldwide have had slow-selling products, which have led us to launch a one-off, timely limited Stock Balancing Campaign. The campaign will give the retailers the opportunity to replace slow-selling products, discontinued items, with best-selling products from our top 500 SKUs. The wholesale value of this campaign is now estimated to be somewhere between DKK 700 million and DKK 800 million.
Last time, we spoke about DKK 500 million-DKK 800 million. The standalone accounting effect of this swap for the full year will be neutral to both our top line and our gross margin. However, there will obviously be a negative impact on sales from the cannibalization. Of course, no one can, with any certainty, say how high this will be. Please turn to slide seven, where we have illustrated the timing of the campaign. As you will see from the Q2 box on the slide, we received discontinued products worth DKK 183 million from our retailers. We shipped or replaced DKK 310 million worth of products, best sellers, back to our retailers in this quarter. The difference, DKK 51 million, gives you the deferred effect that we will ship in Q3. The reason for the difference is normal procedure.
We need to receive and control before we issue orders and ship out the replacement. The same deferred effect will presumably happen in Q4, so there will be different phasing on receiving and replacing until the end of the year. Then the campaign will be fulfilled, and the work will be between DKK 700-800 million in wholesale value. There will be no deferring into 2013. Just to make it easy for you, the numbers for the first half year is that we received DKK 523 million from our retailers, and we shipped or replaced DKK 472 million of best sellers back to them. The difference, DKK 51 million, is the same deferred effect into Q3. Now, please turn to slide eight, where we have shown what impact the campaign has on geographies.
Here you see the campaign's impact per market. As you can see from this slide, basically all of our markets, but particularly Europe, are, as expected, heavily impacted from the replacement of stock this quarter. To illustrate the impact on the individual geographies, we have calculated the relative share of replaced items versus revenue in the right-hand column. In the Americas, items corresponding to 20%-21% of revenue were placed during the quarter, 29% in Europe, and 27% in Asia. These replacements, which again, may have affected retailers' purchasing pattern. So now please turn to slide nine, where I'll talk about how the campaign has affected the retailers. The slide shows you the received and replaced volumes for the different types of channels.
Our retailers have welcomed the Stock Balancing Campaign , and it continues to see a high participation rate from retailers, both in numbers of stores and value of returns. The request from retailers wanting to return discontinued items show total participation rate of approximately two-thirds. Among the concept stores and the shop-in-shops, the rate is even higher, approximately 80%. So again, I apologize having to take you through this rather extensive presentation to explain the campaign, but given its strategic importance, we found it necessary to do it in this painful way again. Now, please turn to slide 10. As mentioned in our Q1 2012 report, the Spring/Summer 2012 Collection launched in mid-March, was very well received from our retailers. This Collection sold in a significantly higher volume compared to the volume generated by last year's Spring/Summer Collection.
This trend has been strengthened by the fact that also the replenishment of these products are continuing at a much higher rate, higher rate than last year. More importantly, sales out revenue from the stores to the end consumer, has in Q2 2012, also significantly improved compared to the sales of last year's Spring/Summer 2012 Collection. Despite a reduced average retail price, this was more than offset by significantly higher volume. Knowing that the Autumn/Winter 2012 Collection is designed and developed in the same direction as the Spring/Summer 2012 Collection, and that this Collection also is more commercially priced than last year, we feel very optimistic for Autumn, Winter. This Collection has been presented to retailers around the whole world, and the reaction has been very positive. We will start to ship this Collection end of Q3. Now, please turn to slide 11.
Although we, per definition, are a wholesale company and more than 90% of our revenue is recognized at sales-in, I cannot stress enough how important our sales-out performance is. Only when a customer, consumer buys our product at retail, have we achieved our objective. We are therefore focusing a lot internally on changing our culture from a sales-in to a sales-out mode. Everyone in the company must ask themselves if what they are doing is helping improving our sales-out. This is not an easy process, but I feel we're making progress every day. I mentioned in the last quarter that I expected to see some improvement in our sales-out development, like-for-like, already in Q2. I'm happy to report that this, as you can see on slide 11, has happened.
U.S., again, had positive like-for-like, and I think this was the sixth quarter in a row with this development. I'm very impressed by their performance. Both U.K. and Australia show clear signs of improvement, and Germany continued a positive trend that we have seen in the last couple of quarters. This is obviously only early indicators, but I see it as a function of our major initiatives. The Stock Balancing Campaign, replacing poor performing product with best sellers, the price and product range alignment, and the successful launch of the new Spring/Summer 2012 Collection. Shortly said, the Pandora offer at retail is now better and more commercial than it was a year ago. We can, of course, not guarantee that this alone will make retail continue to improve, but everything else being equal, it is clear that this will improve our performance.
So now please turn to slide 12, where you will see that we confirm our financial guidance. For the full year, we expect to generate revenue above DKK 6 billion, a gross margin in the mid-60s%. This is updated from previously guided low 60s%, and an EBITDA margin in the low 20s%. Our CapEx is expected to be around DKK 300 million. We expect an effective tax rate of 18%, and we expect to open at least 200 new concept stores. So with this, I would like to hand over to Henrik Holmark, our CFO.
Thank you, Bjørn. Please turn to slide 13. Our overall revenue for Q2 2012 was in line with our plans, as Bjørn mentioned in the introduction. As was the case for Q1 2012, Q2 2012 was negatively impacted by the ongoing Stock Balancing Campaign. Revenue in Q2 2012 was impacted by replacement shipments of DKK 210 million, which can be compared to DKK 162 million in Q1 2012. Total revenue was DKK 1,260 million, which is a decrease of DKK 132 million or 9.5% compared to Q2 2011. The decline was mainly driven by lower average selling prices, as volumes were roughly flat year-on-year. The decline in average selling prices is split on currency with a positive impact of 6%.
Price reductions implemented late Q1 this year, with a negative impact of 2.9%. Product mix with a negative impact of 12.5%, and a small positive impact from change in market mix of 0.3%. A significant driver in the negative product mix effect is our launch of our Spring/Summer 2012 Collection, a Collection at significantly lower average sales price compared to the same Collection last year. Average sales price per unit sold in the quarter was down from DKK 135 in Q2 2011 to DKK 123 in Q2 2012. Please turn to slide 14. This slide looks at the development in our distribution network. In Q2 2012, we opened 68 new concept stores, of which 8 stores were opened and owned and operated, mainly in Italy and France.
Openings in new markets more than doubled compared to Q2 2011. On the stores outside concept, concept stores and shop-in-shops, we continue to close a significant number, mainly white stores and mainly in Germany, resulting in a decline in the total number of stores for the group. The review of our store network in Germany has also led to reclassification of a number of gold stores to lower categories. Please turn to slide 15. Looking at the revenue development by major geographies and markets, you will see that in Q2 2012, we had 54.5% of our revenue in the Americas, 32% in Europe, and 13.5% in Asia Pacific. As previously illustrated by Bjørn, all regions are significantly impacted by the ongoing Stock Balancing Campaign , with the highest share relative to revenue being in the European markets and in Australia.
In the region, Americas, revenue decreased by 5.1% to DKK 687 million in Q1 2012. Excluding foreign exchange movements, revenue decreased by 14.6% compared to Q2 2011. In Europe, we experienced a decrease in revenue of 16.6% in Q2 2012 versus Q2 2011, which is mainly driven by the U.K. and Germany. We saw a growth of 9.1% in the segment, Other Europe, which was driven by new markets, Italy, Russia, and France. In Asia Pacific, revenue decreased to 8.1% in Q2 2012 compared to Q2 2011. Excluding currency movements, the revenue in the region decreased by 14.1% year-on-year. In Australia, reported revenue was down 2.2% year-on-year, or a decrease of 8.3% in local currency.
In Australia, the replacement shipments made in Q2 2012 under the Stock Balancing Campaign amounted to 30% of reported revenue. Please turn to slide 16. The revenue distribution between product categories is, as a lot of other numbers in this release, highly affected by the Stock Balancing Campaign Especially the categories, rings and other jewelry, have been significantly impacted by the imbalance between received and replaced SKUs in the Stock Balancing Campaign , leading to a comparably positive effect into the categories, charms and silver, sorry, charms and silver and gold charms bracelets. In Q2 2012, revenue from charms decreased by 2.2% compared to Q2 2011. However, with significant replacement shipments being made, amounting to approximately 23% of reported revenue on charms. Revenue from silver and gold charms bracelets increased by 17.4%, a growth which is despite the significant replacement shipments made.
This is, among other things, driven by our introduction of gift, gift sets, where consumers buy a ready-made set consisting of a bracelet and one or two clips or charms. Rings decreased by 13.5% and represented 6.1% of total revenue in Q2 2012. Rings and other jewelry together represented 10.5% of total revenue in Q2 2012, compared to 19.7% in Q2 2011. Please turn to slide 17. Our gross profit in Q2 2012 was DKK 856 million, compared to DKK 1,035 million in Q2 2011, resulting in a gross margin of 67.9% in Q2 2012, compared to 74.4% in Q2 2011.
The drop in gross margin is mainly driven by a negative impact from raw material price increases of 6.7%, offset by a positive impact from currency of 1.3%. Price and mix effects are impacting gross margin negatively by 1.1 percentage points. In accordance with our policy, we have hedged expected consumption of gold and silver in the coming four quarters, fully for the nearest quarter, and 80%, 60%, and 40% of expected consumption in the quarters following that. In combination with our current inventory, this means that we are fully hedged in 2012. Excluding our hedging and excluding the time lag effect from our inventory, the underlying gross margin would have been approximately 66% based on average gold and silver market prices in Q2.
Under the same assumptions, a 10% deviation in quarterly average gold and silver prices would impact our gross margin by approximately 3 percentage points. Please turn to slide 18. Distribution expenses increased slightly to DKK 456 million in Q2 2012 compared to DKK 443 million in Q2 2011. In Q2 2011, sales and distribution costs were affected by amortization of CWE distribution rights of DKK 46 million, whereas Q2 2012 includes amortization of French distribution rights of DKK 7 million. These elements, these two elements will not impact future quarters, as the CWE distribution rights were fully amortized end of Q2 2011, and the French distribution rights are fully amortized by the end of Q2 2012.
The increase in sales and distribution cost of DKK 43 million is after adjusting for these two aforementioned amortization elements, driven by new markets, as well as from higher share of owner and operator stores compared to Q2 2011. Marketing costs declined slightly from DKK 191 million in Q2 2011 to DKK 171 million in Q2 2012. Administrative expenses amounted to DKK 227 million in Q2 2012 versus DKK 152 million in Q2 2011. The increase in administrative cost is mainly related to increased headcount in new markets and at head office, as well as IT infrastructure investment. We have in Q2 2012 prepared the transition of two additional markets to go on to our ERP platform in Q3.
Early Q3, Australia went on our global platform, and Eastern Europe will go on the platform late Q3. Additionally, the finance shared service center in Warsaw that we have previously spoken about, that covers the vast majority of Continental Europe, has gone live, and our U.K. warehouse has been transferred to our Central European distribution center in Hamburg. Please turn to slide 19. Looking at the EBITDA margin by region, EBITDA for Q2 2012 decreased by 57% to DKK 220 million, resulting in an EBITDA margin of 17.5%, down from 36.8% in Q2 2011. Across all regions, generally, the margin decline can mainly be explained by the impact from the ongoing Stock Balancing Campaign and the overall reduction in gross margin.
Europe and Asia are, as regions, also impacted by startup costs in new markets. Please note that the regional EBITDA margin listed in the table for Q1 2012 have been recalculated, incorporating the difference between volumes received and volumes returned in Q1 2012, in connection with the global Stock Balancing Campaign , in order to isolate the effect from the deferred volumes from one quarter to the next. I want to stress that it has no impact on consolidated group numbers, neither for the quarters nor for the half year. Unallocated costs were minus 9.9% in Q2 2012, compared to minus 5.6% in Q2 2011. Please turn to slide 20.
Free cash flow, cash conversion, and the operating working capital ratio for Q1 2012, sorry, for Q2 2012, is distorted by the Stock Balancing Campaign and is therefore very difficult to compare to prior periods. In Q2 2012, Pandora generated a Free cash flow of DKK 91 million, corresponding to a cash conversion of 144.4%, compared to 36.3% in Q2 2011. The decrease in Free cash flow from last year is driven by a decrease in earnings and is furthermore impacted by an increase in inventory, which is only partly offset by a decrease in trade receivables. Operating working capital increased from Q2 2011, as well as from Q1 2012, in both cases, driven by inventory.
The increase in inventory from DKK 1,697 million in Q2 2011 to DKK 1,925 million in Q2 2012 can be explained by an increase of 29% in gold and silver prices, and products worth DKK 180 million sitting in inventory end of Q2 2012, coming from takebacks in the Stock Balancing Campaign , which is awaiting remelt. The increase in inventory from DKK 1,668 million end of Q1 2012 to DKK 1,925 million end of Q1 2012 can similarly be explained by an increase in gold and silver prices. For this period, it was 7%, and an increase of DKK 90 million in inventory relating to products from the Stock Balancing Campaign that are waiting remelt. With this, I'd like to hand back to Bjørn to conclude the presentation.
Thank you, Henrik. So let's summarize on slide 22. Our group revenue was DKK 1,260 million. We had a gross margin of 67.9%. Our EBITDA was DKK 220 million. That gives us an EBITDA margin of 17.5%. I think we can say that the quarter progressed as expected. The Stock Balancing Campaign is on track. We've had a successful launch of Spring/Summer 2012 Collection, and a very encouraging initial feedback on our Autumn/Winter 2012 Collection. Our full year revenue and EBITDA margin guidance is confirmed, with an updated gross margin. And most importantly, maybe we continue to focus on our customer and consumer, and sales-out is our major focus. So thank you, everybody.
This concludes our presentation, and Henrik and I would like to open up for any question you might have.
Thank you. As a reminder, ladies and gentlemen, if you'd like to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel that request, please press the hash key. Your first question comes from the line of Michael Rasmussen of ABG Sundal Collier. Please go ahead.
Thank you, and good morning, everybody. Now, three questions to start off with. I would like to start and hear a little bit about your thoughts on your future capital structure. We have seen that the net debt is coming down to 300 million DKK. And if I look at the cash flow over the year, and particularly in what happened in the second half last year, despite everything, this points to the fact that you should go cash positive in about one and a half quarters or so. So if we can please hear the thoughts from management on your future capital structure, kind of, what kind of cash do you actually need running this business?
My second question goes a little bit more into the different cost lines in the P&L. Obviously, I know that the things are being sorted quite materially right now from the stock balancing program. But in terms of, for example, the administration costs, I mean, what is going to happen over the remaining part of the year? Are we going to see higher costs from ERP implementation, other IT costs, consultancy costs, and are marketing costs going to be relatively stable here at about 14% of sales? And my final question is on the upgrade in terms of your gross margin. What actually drove this upgrade? Was it better price mix or raw material costs, or what drove this one? And why didn't you change your EBITDA margin guidance? Thank you.
I think I can start. First, your question about capital structure. I think I said this also last time, is that the company is looking at the capital structure and have announced that we will talk about that till the end of the year. The board has formed a committee where management is also a part of it, and we are discussing the capital structure. So I think I'll have to wait until we have the results out of that committee. When it gets to the cost structure, then I'll start with marketing and, as you can imagine, when you're new in a company, you're turning now every stone to look at the cost. And in marketing, we have identified quite some costs that I would say is not necessary.
So we have removed a lot of what I would call sponsorships and non-sales driven marketing, and are trying to save that in our budget. So you might see an absolute saving on marketing going forward. When it gets to the question about admin, then-
Sorry, sorry, Bjørn. So does this mean below 14% of sales?
Well, percentage is based on what sales is, isn't it? So I can only judge it on an absolute level, and then when we see what revenue comes in, we can discuss the percentages. I think it's important where we are today, that we should not slow the marketing pressure when it gets to what we spend in media and how visible we are. But I think it's obvious that things that doesn't bring anything on the top line, we should remove, and that's what we've been going through, and we found some substantial costs that we can actually take out. And if needed, we can then also translate from non-productive marketing to what I say, sales-driven marketing.
So we are looking at that, and right now, I think there's actually an absolute decrease possible in marketing. When it gets to the admin, then I think I made it pretty clear in my speech that I'm not happy with the percentages that we're currently having, and we are looking at our costs everywhere. But as I also said, you know, this company is in a transition in the sense that we're becoming a global company and trying to have one platform, trying to have less warehouses and all that, and these things take time. And to tell you exactly now what the cost ratio will be would be premature for me.
But I can tell you that we are working very hard on it and I have a good feeling that we have identified where we can save and where we can stabilize costs. I don't think I'm qualified to say anything more than that right now.
On the guidance, please?
Well, again, I mean, the gross margin, we also talked about last quarter, that we have seen a development which is positive on the gross margin, resulting from many things. I mean, the product mix that we're selling, those products that we actually have the highest margin on, and we've been helped also from other external factors. And what we saw now is that the band of the margin was then going from the low 60s to the mid-60s, you know, and we felt it was necessary to say that. We didn't feel that that should trigger a change in our EBITDA margin because we set the low 20s.
So it is a little bit the mechanics of these bands that we said, you know, we'll update one of them, but we'll keep our major guidance, and then hopefully there is a surprise to all of us in a positive direction. But at this point in time, this is what we felt comfortable with.
Okay, thank you very much, and, well done.
Thank you. Your next question comes from the line of Lars Topholm of Carnegie. Please go ahead.
Yes, I would also congratulate you on a good quarter. I have a couple of questions. First, if we discuss the gross margin, you have previously indicated that a long-term gross margin, you would be looking at around 62%. But since then, you have now seen a favorable change in your mix. We have also seen commodity prices go your way. So I wonder if you can put some new flavor to that long-term margin outlook. Then on the revenue side, two question. One is the slowing sales out growth in the U.S., you are now down to 3% growth. I wonder if you can put some comments on the nature of that?
My observation from speaking to U.S. dealers is that you're now seeing cannibalization because of increased store density. I wonder how you look at that. Why should we not fear that you're doing a Germany or Australia in the U.S.? And then a third question, you mentioned in the presentation that the demand for the Spring/Summer Collection is up, and weighted sales-out is more or less flat. So just to confirm, can we say that end user demand is down for the old products and growing for the new products? Thanks.
I'll see if I can sort all the questions.
If so, just repeat, don't worry.
No, no, no, no, no. Just, I mean, your first question on the guidance on the margin long term, you know, I can't give you. You know, we've guided for 12, and we stick to that. And then I hopefully, when I know the business better, we can start to talk about long-term margin. But again, I wouldn't do that right now. When it comes-
But it's correct to assume that lower commodity prices and better mix are everything else equal, something which will be sustainable. I mean, the mix improvement is not just a temporary phenomenon as you see it, is it?
No, I think we all agree that if the commodity prices come down and our mix is optimal, then our margin goes up. That's, I fully agree to that. But, you know, commodity prices, we don't know in the future, and the mix we're having now, when we start to grow, it can also be different. So at this point in time, I don't think we should guide on any long-term. But you are right, all these effects you mentioned have a positive effect on our margin, yes. Everything else being the same.
Yep.
When it gets to the sales in the U.S., first of all, I think having a 3% like-for-like on numbers a year ago that were also up is a positive thing. I always say that being up on up is more difficult than being up on down. And if you look at U.S. retail in general, that we have been up every quarter, at least six quarters, I think that's the only data we have. It's for me pretty impressive. And I'm actually very happy with that.
When you talk about the cannibalization, then, first of all, I don't see, and I actually guarantee you, we don't have a distribution footprint issue in the U.S. like we've had in Australia and Germany, because the American team has been very, what should I say? Structured in the way they set up distribution, and we even have quite some white spots in America, especially on the West Coast. That there can be cannibalization in an isolated mall, for example, where, you know, we have a concept stores, and we also have a multi-branded store with Jared or something, that could happen.
You know, I'm sure if you talk to Jared, they don't like if we put the concept store next to them, that, but that's the nature of the business. I don't see any danger of cannibalization in the American market, in total. And I do actually think we can increase our point of sale quite some areas in the U.S. without damaging like-for-likes, in total. But again, I mean, the American market is also not isolated from the rest of the world. And you know, we are dependent also in the U.S. of external things. So I'm happy with the development, to be honest.
Okay.
When it gets to your Spring/Summer 2012 question, you know, sorry. It is fair to say that when our revenue is totally down, but the Spring/Summer Collection is up compared to last year, then, of course, we are selling relatively less of the other stuff. That's mathematically correct.
I derived at the same conclusion. It's just nice to hear from you because it, of course-
Yeah.
Addresses the fat issue.
If I had a different answer, it will be magic, because it couldn't add up, so you're right.
Excellent. Well, one final short question, if I may. You mentioned that there were some costs from running on double systems on the operating cost side. Is it possible to quantify how much that is for the quarter?
No, I can't. I can't.
Okay. Thank you very much.
Thank you.
Thank you. Your next question comes from the line of Klaus Madsen of Handelsbanken. Please go ahead.
Yes, hello, it's Claus Madsen. My first question relates to the costs. We already discussed that they were elevated in second quarter, but you pointed to a decrease. Is that relevant already for Q2, and will we see the very high double cost level decline into Q3 already?
I, I heard you very, very badly. Can you repeat? You're very far away. Can you, can you repeat the question, please?
Do you hear me better now?
Much better.
Yeah. My first question relates to the cost picture for the second half. Obviously, you have elevated costs in the second quarter, but will we see a significant decrease into the second half of this year, or should we assume sort of elevated levels, at least on admin, some quarters ahead?
I think you should assume elevated levels on admin for the next quarters. I think the benefits of everything we talk about, you will start to see in 2013.
Right. Is it then also fair to assume that, given that you don't upgrade your EBITDA guidance, or margin guidance, but lift the gross margin, you have basically become more ambitious on certain projects and allocated excess costs for that, since you guided at the beginning of the year?
No, I wouldn't say excess cost, no. Again, I'm back to these bands, low 20s and mid-60s, and there is some room to move there, and hopefully move in the right direction.
All right. Then on the outlook in your key markets, Australia and U.K., your predecessor earlier this year was quite bullish on a return to growth in Australia towards the end of 2012. We see things trending in the right direction in both the U.S. and, sorry, both the U.K. and Australia. Would you assume that you get to flattish or even growing businesses in those regions on a concept sales out level end of 2012?
Well, I assume you're now talking sales out.
Correct.
I think, if I take Australia first, you know, we've been through 3-4 quarters of cleaning up the distribution, and it has been, I would say, very messy, but still on a very high market share. And if you look at the trend, and the things that are happening, I am optimistic about the second half when it gets to sales out. And when I'm optimistic about the sales out, I'm also optimistic about the sales in, and you saw the revenue decline in Australia being much smaller now than it's been before. When it gets to the U.K., I'm more skeptical about the whole retail environment.
I mean, those of you who are in the U.K. see that the high street is still very, very promotional, and retail is not doing great. And unfortunately, we are part of that too. So we have decided, as I said to you last time, not to discount, and keep our price level and keep our brand equity as high as we can. So it might be more difficult, in that environment to turn into positive like-for-like. But again, I can guarantee you that our offer in each of our stores are better, in Q3 and Q4 this year than they were last year. Is that enough? I hope so, but I can't guarantee it, in that environment. I think U.K. more difficult than Australia.
Thank you. Then just finally, could you briefly comment on the two key Asian markets, your sort of reconfiguration of the setup in Japan and any progress in China?
Well, I think you see from the numbers that our Asian business is around 3% of the total, so it is, at this point in time, a small business. And I said last time that, you know, I have personally spent a lot of time in Asia over the last 15-20 years, and I think Asia is a very interesting and future growth market, but it's also a complicated market. And I have, as you've seen, also sent Sten Daugaard there, which is our Chief Development Officer, part of the executive board, to bring the market closer to Denmark. And I think you should give me some time reviewing his findings, and I will spend time there myself before I'm commenting on any changes.
We have stores in Asia that are doing very, very well. I mean, Hong Kong being the best place, where we have 7 stores that actually belong to us, and we run ourself, and they are doing extremely well. And then we have good stores in China and poor stores in China, and the same thing in Japan. So, again, give me some time, and I'll be able to talk to you about it.
Right. Thank you.
Thank you. Next question comes from Antoine Belge with HSBC. Please go ahead.
Yes, good morning. It's Antoine Belge with HSBC. Three questions. The first question is actually following up on the previous question about Asia outside of Australia. Listening to you, I've got a feeling that since there are many things to implement at Pandora at the moment, that maybe growth in an emerging market like China could be actually a bit postponed, and you want to maybe focus on more the, you know, your current very big markets. I mean, could you maybe comment on if my assumption is right? Second question is regarding inventories, especially at the end of this year. Obviously, we saw an increase in inventory, and you mentioned why. That's the result of the Stock Balancing Campaign.
Is it fair to assume that towards the end of the year, as you probably are going to melt down some of that inventory, that inventory increase should be more subdued? And finally, a more general question for you. Since you've took your job, I mean, have you identified some areas of the strategy that needs to be tweaked a bit compared to what you're especially what the interim CEO had in mind? Or are you just embracing, you know, the analysis that was made at that time?
I can confirm that I think that Asia is a major growth market for us going forward. But again, it is 3% of our business. I don't think there is any change in the expectations of Asia, mid and long term in this company. And it's not like we prioritize old markets now more than Asia. But I do think that in the life cycle of our company, it is very important that we talk about quality and not quantity. And that's why I'm just flagging that we would like to have good decisions in Asia, where we feel comfortable and maybe run one step slower than fast to get quantity. And that maybe has to do with me.
I don't know, maybe that is a change, but we haven't really changed anything at this point in time. I'm just flagging that. Don't expect 50% of our revenue to be in Asia in three years. I mean, and I think then we can talk about it in three months' time, when I have seen it more with my own eyes. I don't know if that is a good answer, but it's actually my only answer at this point in time. When it gets to the inventories, then I think Henrik said we have DKK 180 million now on our balance sheet. You know that we have already gotten DKK 523 million returns, so the difference is already melted.
This 180 will be melted during the rest of the year, and depending on if it ends at DKK 700 or DKK 800, the goal is to melt everything by the end of the year. But the operational melting, especially when you have jewelry with stones, is that we have to pick the stones, and we have decided not to melt stones because that is very expensive. We are trying to save the value as good as we can. The goal is, to your question, to have the melting done by the end of the year. If we succeed that 100%, I don't know, but it shouldn't be a big part sitting on the inventory at the end of Q4.
Make a mark. Can I-
Sorry.
Make one comment? I think it's a slip of tongue.
Okay.
You mentioned that the difference between the DKK 523 and the DKK 180 have been remelted. The DKK 523 is the wholesale value-
Okay.
Of what we have taken back. So the DKK 180 is our cost price on those goods that are taken back. Remelting in Q2 has been very limited, so the majority of what has been taken back still sits in inventory and will be remelted in second half.
Okay. No, no problem. That's good. And your final question, if, if I had, had to tweak the strategy of, of my, my, former management, I would say no. But, but as you know, strategy is one thing and execution is a different one. So, we're working from, from week to week, finding solution to issues we find, and, and I'm sure I'm tweaking something there, but, but there is nothing big in, in the, in the, in the, in my head, which is different than, than the strategy set out to you already end of last year. We, we are going down that road because it's a solid strategy. I think the initiatives were the right ones, and, and it is about execution, and then, yeah, to work hard on, on, on that.
Okay, maybe just, you know, follow up on inventories. Is it fair to say, or at least at this juncture, you're expecting that the inventory increase at the end of December will be of a lower magnitude than the one at the end of June?
Everything else being equal, yes. I mean, DKK 180 million is sitting at, in inventory end of June, and we will remelt that. So you're correct. Everything-
Thank you. Thank you very much.
Thank you. Your next question comes from the line of Kenneth Leiling of Danske Bank . Please go ahead.
Yes, thank you. It's Kenneth Leiling here. First of all, could you help us understanding exactly how big the Autumn/Winter Collection generally is in terms of share of sales in that period of time? I believe you previously talked about the Summer/Spring Collection being up towards a quarter of the sales generated. If you could help us in terms of that new Collection as well. And are you already now seeing the reason for your positive comments about it, is because you're already seeing it in your order intake right now, or is it just verbal feedback that you're seeing? The second question is actually on this whole inventory take back situation. Could you just clarify whether it has any impact on your EBITDA margin, in your opinion, in terms of handling all of this?
I believe you said it had no gross margin impact, but how about the EBITDA margin? Thanks. Those would be my two questions, yeah.
Yeah. The range, Autumn/Winter range, which historically, I think in this company, have a sales share between 15% and 20%. But of course, we hope that this will have a bigger share, as we saw in Spring/Summer. It is about 120 design variations. And, you know, if I put Spring/Summer and Autumn/Winter together, then it is a commercially right price range, which has the right designs that the market needs. That's why I'm positive. When you ask why I'm optimistic, then we have launched this to our partners now in all continents, also been part of most of these meetings, and we have started taking orders on them. So it's both verbal feedback, and it's order feedback, so it's both.
Okay, if I may just follow up. So, how big would Autumn/Winter be together with Spring/Summer in sort of the second half of the year? I mean, is that the right way to look at it? You should add the two collections and say, how much would they be in terms of our total sales, so to speak?
Well, I can't give you that answer, because if I knew, then I would have all the answers, wouldn't I? I mean, the share of the Spring/Summer Collection increased substantially in the first half. And we see that from the replenishment orders in the Summer, that this Collection is continuing to sell very, very well. If we assume the same thing for Autumn/Winter, which the feeling is that the share of these two ranges together will be much higher than they've been before. If that is 30% or 40%, you know, no one really knows, do we? I mean, that's but I'll tell you after the fact.
Fair enough.
On your EBITDA margin question, Kenneth, well, we all know obviously there's an EBITDA margin impact from loss of revenue to some extent. But I think you are addressing the cost base impact, and it's fair that, well, it does have impact on our cost base. It's obviously those volumes that go through our system that are not, you could say, reflected in our revenue, is impacting handling costs and so on. But we cannot quantify the exact amount by which our cost base is impacted, but there is an impact.
But I think it's fair to say that you know, we're talking about millions units, you know, it's a seven-digit number of units that are going through the system, and of course, that drives costs. I mean, it does. But analyzing exactly what it is is very, very difficult. So I'm very glad that we don't have a stock take back problem next year because you know, it is, it has been a burden on the whole system, and it is very complicated to even account for, to be honest.
Yeah, because that will actually lead to my follow-up as to whether this inventory take back would be the reason for the very weak margin in Europe, in your opinion, EBITDA margin around, what, 5% in the quarter? I'm trying to understand whether that's sort of a one-off-ish thing because of this take back situation, or how I should look at that, if you could comment on that.
Well, it's obvious that the EBITDA margin in Europe is impacted by the Stock Balancing Campaign. I mean, that's obvious. And I think you will look at much higher EBITDA numbers for Europe going forward. But, I mean, Henrik, maybe you want to fill in?
Well, there is no doubt that both, I mean, not only Europe, but actually also Asia Pacific, I mean, both those regions are impacted more, in, I mean, relatively more than Americas, for instance, as the stock balancing program is larger relative to revenue. So yes, there is a large impact on Europe, but actually also on Asia from the Stock Balancing Campaign .
But you can't help us out in terms of understanding how big it might be in the quarter?
We can't quantify that. So you could say, I mean, I hate going down that road, and I don't want to go down that road, calculating underlying revenue and all of that, because no one really can predict what things would have looked like, had we not had this revenue. So therefore, it's really difficult to say exactly the impact, but there is no doubt that it has a significant impact, as I mean, Europe, 29% of revenue, or replacements are 29% of revenue. We have Asia, 27% of revenue, so it is a significant impact.
Okay, fair enough. Thank you.
Thank you once again, ladies and gentlemen. If you'd like to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel that request, please press the hash key. Your next question comes from Dan Wejse of Nordea. Please go ahead.
Yes, hello, Dan Wejse from Nordea Markets. If we could just briefly go to Germany, we see positive sell-out, but you're still down, underlying on revenue. What is the explanation for the good development in the concept stores and are there some special things we should be aware of? It has been relatively good for a while, and previously you have stated that that was also marketing driven, et cetera. So please tell if you see a real change here in the concept stores in Germany. That was my first question.
I think the improvement is basically that we have worked much better in the stores, and we've done the basics right. I don't think there's any other magic to that. I do also think that the cleanup of the distribution in Germany, which has now been going on for 2 quarters, has helped these stores, and it's a sum of many things. Of course, I hope that this is a new trend and this is how Germany retail should perform going forward. So it's a combination of many things, Dan, and I wouldn't tie it only to one issue.
We have focused on sellout, at least in the last two quarters, very heavily, and I think the team there has shown that they have done the right things, and that's what you see the result of.
Okay. Then turning to Asia Pacific, we have talked a bit about it, but please elaborate a bit more on that, because it appears that we see your growth ex FX and store rebalancing being a quite negative double digit in the quarter, despite of you opening quite a lot of stores. So please tell us, maybe give an indication, what is the sell-out overall for new stores, but also how much of this decline relates to maybe problems with the selling in the new markets, and how much is problems in New Zealand? So please give a bit more flavor on this development, because it appears weak, given all the stores that you have opened in the region.
Well, first of all, I mean, it is 3% of our sales. So when you do percentages up or down, you know, the mathematics of it makes the table vary. And don't forget that the revenue we have here is mostly wholesale, so it's selling into them again. And many of these stores have been open for a very, very short period of time, meaning that when they get their first stock, you get the sell-in, and until they then start to replenish, it takes a while. So I think you will see variances between quarters that could be strange for you to see. And there's nothing abnormal with the numbers that has now come out. The only thing is that, yes, there is a variance between how stores perform.
I mean, some stores perform very well, and some does not perform very well. And that is the only thing that triggers me to say, okay, I mean, make sure that we get closer to it. Make sure that we understand the dynamics of this before we come out and say, you know, everything is rock and roll, and we will open many, many, many stores. We are aware of that Asia is very important for us, and it will be an important commercial region for us. But I do think we need some time, so at least I can tell you what I think the speed of that can be. So, I again, I think that's the only flavor I can give you then.
Okay. Then lastly, on your cost on operating expenses. You have for quite a while been stating something like, "Yeah, we should expect costs to be more not grow as much as we have seen previously, or start to stabilize." And so far, we have only seen it going up. What is it that makes you more sure about this now? Is it because you're taking new actions that have not been done previously in the company, or what are the thinking behind? And then also, could you maybe give us a bit more flavor on what is actually the cost impact of the relatively many stores that you are still opening yourself? That should also have an impact.
Please, tell us a bit more about why we should see this development in cost, except from the marketing things that you have already touched upon.
Well, I think when it gets to what I've said, when it gets to systems and double cost, you know, these initiatives is not something that I started. I mean, the company has for a while identified what we need to run a global company, and I've started processes in logistics and IT, and also setting out admin in new markets for a long period of time. And right now, I don't see big projects that have not already started coming. So that's why I'm saying that, you know, as these projects are being implemented and as new things are replacing old things, then I'm positive that you can actually reduce costs or at least not increase the cost. So that's why I'm saying that.
What has been said before, I mean, it's difficult to me to judge on, because I can only see what I see currently. I don't know, Henrik, if you want to add something to it, but-
No, I've none. I mean, if you look at the I made a comment around sales and distribution costs. That's been driven by new market and retail. Addressing your question, I mean, if you look at that increase that is driven by new markets and retailers, roughly, I mean, two-thirds new markets, one-third retail, in that range, if that helps you a little bit.
To your question about owned and operated retail, of course, you know that there is a cost base on that, but you also know you have double margin on that. So, if you look at that, it's kind of a wash. We are currently opening those stores that we planned. We haven't changed our strategy of wanting to open more stores, and we don't plan to do that either. But I think it is a valid strategy to have some owned and operated stores in markets, especially in new markets, where you go in to establish the brand. And I also do think that it helps our organization become more like retailers, or at least that we can think more like a retailer.
But again, there's no change, and I can't give you a number exactly what that drives, but I think we have 104. Is that what we have now?
102.
102 owned and operated stores. And I'm happy to report that many of those work very well. And for all the things we are implementing, when it gets to, you know, new merchandising, new pricing signs, new furniture, all that, we are testing and using those stores to gain knowledge. And I'm very glad we have those stores. And then we will have to discuss, you know, if we stop by 102 or if we should have a couple more, but there's no change in the strategy of saying we should have more or less owned and operated.
Okay, thanks.
Thank you. Our next question comes from the line of Rod Whitehead of Deutsche Bank. Please go ahead.
Good morning. Could you just talk about the pricing a little bit more? I mean, slide 10 says that the Spring/Summer prices were markedly down on last year, but slide 13, you know, it says there was a 3% price decline, which isn't markedly down. So I suppose my question really is that when you look at that big reduction on slide 13 that relates to product mix. Is some of that really lower prices too, but you can't measure it, i.e., you're replacing a silver charm with a new silver charm at a lower price? You can't measure the price differential because it's a different charm. So I suppose, you know, the fundamental question is, how much of prices do you feel have really been realigned?
And has the realignment been markedly different across the four major product categories? And the other sort of semi-related question, clearly the stock balancing program has been bigger on rings and other jewelry, reflecting slower moving stock in those areas. What do you feel the prospects are for those two categories going forward? You mentioned that there's a new ring collection , which is selling well. Is that at a significantly different price? And in general, with rings and other jewelry, has the problem been the product or the price, or just that that's not what the Pandora brand stands for?
I'll start with the last one, because if you look at the Stock Balancing Campaign, we took out slow-moving items, and among the slow-moving items, there were a lot of items that were very highly priced. And if you look at the rings, for example, there was a lot of rings coming back, and in my opinion, not necessarily because rings was a bad category, but the rings were far too expensive. So what we have done is that we've taken expensive rings back, and we have launched a new ring collection , which is priced, let's say, on average, between EUR 50-EUR 120, and they are doing extremely well.
So, talking about the categories, I have said and I'll repeat it, I think that the charms and bracelets is our core category, and we will lead there, and we will not, you know, be afraid of that becoming too big, but we will invest a lot of time and effort to make that our major, major categories. And the second category where we see huge opportunity on, I'm very optimistic about the results I'm seeing, is the rings. The rings priced at our sweet spot, which again, is then EUR 50-EUR 120, that is important. When it gets to your price question, you know, having sold in many items at high prices that didn't sell out distorts the whole picture.
I think if you look at the Collection that we launched in Spring/Summer, that was priced in what I call the sweet spot. I mean, the Spring/Summer Collection, measured to the Spring/Summer Collection a year before, was actually 30% down. And that was because a lot of the items that were launched a year ago, they didn't sell at all. So that's i t's why it's very difficult to talk about average price, because what are you comparing? I think our average price in selling in for Q2 was down about 9%. And on the Spring/Summer Collection, it was down 30%. The good thing is that the volumes of this Collection are more than this price decrease have replaced the revenue.
So, I think it's not about measuring the average price against average price, unit by unit, it's about the mix, and that is a commercially priced package where customer wants to buy Pandora. That's why this mix effect, average price effect, is very difficult to talk about because it's almost a theoretical number.
Can I add just one thing to that, more technical side of your question? You were referring to slide 13, that mentions roughly 3%, 2.9% from price reductions. It's a rather detailed breakdown, actually, we do of the revenue movements that we have into these various elements. Those 2.9% is specifically the price decreases that we implemented in Q1 2012, just to clarify that. So every, I mean, all other movements that impacts the average price development is then in the product mix and mix between markets and currency and so on. So, but the 2.9% is specifically the price reductions made in Q1.
Okay, so are the price-
The 2.9% that Bjørn mentioned.
Are the price reductions made in the previous three quarters, which therefore would be part of an annual price reduction, actually within product mix?
Yes.
Okay, that's, that's very helpful to understand. Thank you. That was really helpful.
Thank you. Once again, ladies and gentlemen, it's star one to ask a question. To cancel that request, please press the hash key. There are no further questions at this time. Please continue.
So, I think that ends our meeting. I would like to thank all of you for listening, and look forward to see you all. Thanks.
Ladies and gentlemen, that does conclude our conference for the day. Thank you for participating. You may all disconnect.